Brace yourselves for the big one
The imminent privatization of PKO BP, the country's largest bank, promises to give a huge boost to the Warsaw Stock Exchange (WSE) for months, if not years, ahead. The largest debut in years, slotted for the end of October or early November, has investors licking their lips. But fears of political meddling persist.
Speaking at a press conference just one day before the issue prospectus was filed with the Securities and Exchange Commission (KPWiG) on July 23, the bank's CEO, Andrzej Podsiadło, forecast that the net profit this year would be higher than the zł.1.23 billion recorded in 2003. Indeed, in the first six months of the year PKO BP recorded a 17 percent net increase on the corresponding period in 2003. And as the 30 percent stake to be floated is priced at zł.5-6 billion by Podsiadło, even a conservative estimate of the whole year's profits gives a price to earnings (P/E) ratio of less than 17, compared to an industry average of nearly 24. This makes the bank an attractive offering, raising fears that the initial impact of the privatization will be to put downward pressure on other stocks.
"But in the longer run, the increased liquidity is what makes the difference between the WSE and other markets in the region," says Roger Molson, a London-based emerging-markets equity strategist at CA-IB Securities, an investment bank. "Prague or Budapest do not have the same potential," he continues, pointing out that pension funds have not been aggressive on stocks in recent months, suggesting that they should have cash on hand to buy into the large IPO.
But, while PKO BP is bound to prove popular with investors, Molson also draws attention to the risks of political meddling, highlighted by a series of recent events. The launching of the parliamentary commission of investigation into the running of PKN Orlen, the country's largest firm, the approaching arbitrage proceedings in the conflict between the government and Eureko, a Dutch firm, over insurance giant PZU and the controversial proposals to retain the 'golden share' rule, all point to the high risks of buying shares in government-controlled companies. Analysts also point out that the bank's costs to revenues ratio has been on the rise, and the fact that the majority stake will remain in public hands does not promise any significant increases in the pressure placed on management to improve performance. And the recent purchase by PKOP BP of a 25 percent stake in Bank Pocztowy from Prokom Investments for an undisclosed price has led to allegations that the transaction was politically motivated.
Moreover, PKO BP's business may seem stable and profitable, but both short-term and long-term factors indicate that it may soon go into decline. In the coming months, rising interest rates will reduce the profitability of the bank's large holdings in Treasury bonds, while in the longer term, demographic trends are unfavorable for its retail business. While four-fifths of Poles are aware of the PKO BP brand, anecdotal evidence suggests that it is hardly popular with the younger, and wealthier, segments of the population.
So the largest bank in this country, which has only just begun the implementation of an integrated IT system, could yet face a tumultuous future. Podsiadło says that the idea of a merger with PZU has not been shelved completely and could yet follow on the heels of the IPO. Should this happen, the creation of a national financial group could satisfy national pride and political ambition. But it would also likely mean that investors end up with shares in a bank that is in a terrible mess.
Speaking at a press conference just one day before the issue prospectus was filed with the Securities and Exchange Commission (KPWiG) on July 23, the bank's CEO, Andrzej Podsiadło, forecast that the net profit this year would be higher than the zł.1.23 billion recorded in 2003. Indeed, in the first six months of the year PKO BP recorded a 17 percent net increase on the corresponding period in 2003. And as the 30 percent stake to be floated is priced at zł.5-6 billion by Podsiadło, even a conservative estimate of the whole year's profits gives a price to earnings (P/E) ratio of less than 17, compared to an industry average of nearly 24. This makes the bank an attractive offering, raising fears that the initial impact of the privatization will be to put downward pressure on other stocks.
"But in the longer run, the increased liquidity is what makes the difference between the WSE and other markets in the region," says Roger Molson, a London-based emerging-markets equity strategist at CA-IB Securities, an investment bank. "Prague or Budapest do not have the same potential," he continues, pointing out that pension funds have not been aggressive on stocks in recent months, suggesting that they should have cash on hand to buy into the large IPO.
But, while PKO BP is bound to prove popular with investors, Molson also draws attention to the risks of political meddling, highlighted by a series of recent events. The launching of the parliamentary commission of investigation into the running of PKN Orlen, the country's largest firm, the approaching arbitrage proceedings in the conflict between the government and Eureko, a Dutch firm, over insurance giant PZU and the controversial proposals to retain the 'golden share' rule, all point to the high risks of buying shares in government-controlled companies. Analysts also point out that the bank's costs to revenues ratio has been on the rise, and the fact that the majority stake will remain in public hands does not promise any significant increases in the pressure placed on management to improve performance. And the recent purchase by PKOP BP of a 25 percent stake in Bank Pocztowy from Prokom Investments for an undisclosed price has led to allegations that the transaction was politically motivated.
Moreover, PKO BP's business may seem stable and profitable, but both short-term and long-term factors indicate that it may soon go into decline. In the coming months, rising interest rates will reduce the profitability of the bank's large holdings in Treasury bonds, while in the longer term, demographic trends are unfavorable for its retail business. While four-fifths of Poles are aware of the PKO BP brand, anecdotal evidence suggests that it is hardly popular with the younger, and wealthier, segments of the population.
So the largest bank in this country, which has only just begun the implementation of an integrated IT system, could yet face a tumultuous future. Podsiadło says that the idea of a merger with PZU has not been shelved completely and could yet follow on the heels of the IPO. Should this happen, the creation of a national financial group could satisfy national pride and political ambition. But it would also likely mean that investors end up with shares in a bank that is in a terrible mess.
